Tata Communications Limited (TATACOMM) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to Tata Communications Earnings Conference Call for Q4 FY'23. We are joined today by our MD and CEO, Mr. Amur Lakshminarayanan; our CFO; Mr. Kabir Ahmed; and Mr. Rajiv Sharma, our Head of Investor Relations. The results for the quarter ended 31st March 2023 have been announced yesterday, and the quarterly fact sheet is available on our website. I trust you would have had the chance to look through the key highlights. We will commence today's call with comments from Lakshmi, who will share his thoughts on the business and long-term outlook, followed by Kabir who will share his views on the financial progress achieved. At the end of the management's remarks, you will have an opportunity to get your queries addressed. Before we get started, I would like to remind everyone that some of the statements made or discussed in today's call may be forward-looking in nature and must be viewed in conjunction with the risks and uncertainties we face. A detailed statement and explanation of these risks are included in our annual filings, which you can locate on our website, www.tatacommunications.com. The company does not undertake to update these forward-looking statements publicly. With that, I would like to invite Lakshmi to share his views. Over to you, Lakshmi.

Thanks, Chirag. I welcome all of you to the Q4 FY'23 earnings call. We witnessed another healthy quarter reflecting strong growth momentum in our data revenues. For the full year, data revenues are up by 10.3%. PAT is up 21.2%, and ROCE is at 28.3% versus 25.4% in March 2022. Our results reflect the disciplined execution of our reimagined strategy, focused on deeper with fewer and our strategic push on products to platform. Our investments in the overlay or as you may call, the Digital Platform Services, over the last couple of years, combined with our strengths with the underlay, positions us uniquely as a contact player. Our unique strengths are very much noticed by our customers in our ability to impact both the cost side as well as the revenue side of outcomes for them. Our products to platform shift, increased investments in front-end sales, particularly in the international markets and building new capabilities across the portfolio is reflecting the growth momentum. Our data revenues grew by 11.2% year-on-year again this quarter. For FY'23, Digital Platforms and Services revenue grew by 15.5%, highest in the last 4 years. To add more color to our data growth, we've added INR 1,317 crores of incremental data revenues in FY'23 against an incremental revenue of INR 903 crores in FY'21 and FY'22 combined. Our digital revenues, including incubation, are 32% of total data portfolio. And our ambition is that this number should be at 50% of the overall data revenue over the next 3 years. Funnel addition in FY'23 was the highest and we recorded more than 50% of growth in large deal segment, and we are seeing good traction across India and international markets. Before I get into details of the performance for this quarter, I take pleasure in mentioning that Tata Communications was selected as a turnaround company of the year by Forbes in March 2023 and that we have, once again, been recognized as a leader in 2023 by Gartner Magic Quadrant for Network Services Global, thus completing a decade of excellence. We further strengthened our DPS portfolio with some new launches this quarter, we launched JAMVEE, a cloud-based application offering, integrated and simplified voice calling solution. This strengthens our offering, especially for knowledge and frontline workforce within enterprises and helping enterprises with a secure and compliant setup. Most importantly, it helps enterprises customers have greater control over deployment and management of Unified Communication state. Let me add with JAMVEE, we'll be able to address 80% of the managed PBX market and the overall market is still growing in high single digits. The other product we have launched is CloudSIM, a software-only SIM primarily addresses on-demand connectivity and enables new use cases such as activating private network connectivity for short periods and provisioning connectivity, only to devices in active use and allowing the enterprises to decrease the total cost of ownership. This is a significant innovation and the only one in the world who has the solution as of today. Moving to our performance. For the fourth quarter of FY'23, our data business remains instrumental to our overall revenue growth momentum. It remains sequentially -- it improved sequentially by 2.2% coming in at INR 3,670 crores. Our Digital Platforms and Services revenue stood at INR 1,080 crores, registering a healthy growth of 15.9% year-on-year and 2.3% Q-on-Q. Our Q4 consolidated revenue was INR 4,569 crores, improving by 7.2% year-on-year and 0.9% Q-on-Q. EBITDA for the quarter stood at INR 1,034 crores while EBITDA margin stood at 22.6%. The profit for the quarter was INR 326 crores. Let me talk about our margins and aspects shaping our EBITDA trajectory. I want to reiterate that we are fundamentally taking the company to a different growth trajectory. I'd always said that double-digit growth would take time and investment, and this year is a milestone with 10% plus data growth on a full year basis and a digital portfolio grown 21% year-on-year, highest in the last 4 years. This is encouraging and an outcome of the significant investments in people, platforms, IP creation, front-end sales and capacity building. We called out to invest in growth, and this was planned. Our full year EBITDA margins is at 24.2%, and it reflects these investments, and we are very well in the range of our margin guidance of 23% to 25%. There is a reason why we see ourselves as a comtech and not as a traditional telco as we focus a lot on capital allocation and ROCEs. Unlike traditional telcos, which are at low single-digit ROCEs our full year ROCE is at 28.3%, and this is despite investments in growth. We have delivered first time double-digit PAT margin and highest ever absolute PAT this fiscal. We are staying the course and FY'24 will continue to be another year of investments, particularly in DPS and our ROCE guidance of 25%-plus remains intact. Coming to our core connectivity business revenues. It grew by 7.4% year-on-year and 1.7% Q-on-Q. We continue to invest in the core capabilities thus transforming our networks to be intelligent and working on their programmability to cater to the new market needs, particularly on-demand needs. Let me spend some time talking about our robustly growing incubation or the Connected Solutions portfolio. The incubation portfolio progressed a multifold, growing by 65.3% year-on-year and 9.4% Q-on-Q. We signed our first bond connected deal with a leading EV manufacturer and are very pleased to support their Pan-Asia scale-up. I spoke about a CloudSIM launch this quarter. It was launched in MWS earlier this year. I'm happy to share that we have signed our first deal as well with a large integrated IoT device and board manufacturer with remote controlling and monitoring capabilities for industrial equipments and plants. This will help them to simplify deployment and reduce costs. Our MOVE business continues to grow strongly and recorded a year-on-year growth, exceeding 100%. Our IoT offering is seeing a growth of greater than 90% in the revenues and a full year and is gaining momentum in international markets, while we cater to both enterprises and smart cities. Being one of the few players with ATEX certified Safe Pass Badge ID solutions in India, our solution has gone live for one of India's largest oil and gas players, which opens new avenues of growth. Now coming to digital platforms and services portfolio. It has grown at 15.9% year-on-year and 2.3% Q-on-Q, a multitude of offerings in the digital platform solution portfolio are intended to consistently deliver more holistic solutions stitching multiple products together for our customers' ecosystems. And when we stitch all of these platforms together, it becomes a digital fabric and creates a robust moat around increasing customer stickiness and insulates us on structural pricing decline seen in the legacy business. The most exciting part of DPS is the strength of this portfolio and suite of applications helping the enterprises to power their hyperconnected ecosystems. We have a good pipeline in our sales funnel and the pipeline of product feature releases and new products in the coming months. The Media business revenues were sequentially down by 2.3% and up by 19.5% year-on-year. Sequential decline in revenue is due to lesser number of events this quarter versus the previous quarter. This quarter, Tata Communications supported enhanced video workflows for Formula E leveraging its media edge platform, giving better quality video feeds, leveraging Internet-based last miles. In FY'23, the team had supported over 20,000 events, which represents a significant growth and revenues were up by 28% year-on-year for this segment. We would like to update that Switch Enterprises, the acquisition, which we announced in the third quarter, we are expecting all necessary approvals to be in place soon and targeting integration -- to begin integration in Q1 of FY'24. Switch will help us gain a strong foothold into the Americas media and entertainment market. Moving to cloud, hosting and security. This portfolio registered a growth of 38.5% year-on-year and 10.1% Q-on-Q. In Q4 FY'23, some of the key wins have been with our IZO Private Cloud and our managed service offerings. From product enhancement perspective, we created automation of orchestration of our IZO Private Cloud Platform, Platform as a Service offering, thus reducing time for provisions within minutes. Additionally, enhanced managed services reporting dashboard our information as a service offering for the solutions deployed on our Private Cloud. Our MSS or security business revenues were up by 26.6% year-on-year. Enterprises continue to see merit in securing network transformation using zero trust architecture, and we recently started working with one of Europe's largest mobile -- automobile manufacturers to help them enable a secure remote work for their 35,000 global workers more effectively than VPN, deliver secure and direct connection to applications and provide identical user experience from office or from home. Our collaboration portfolio grew by 1.8% year-on-year and declined 3.6% Q-on-Q. There have been some customer-specific issues in layer 1 offerings, and hence, you see a dip in revenues this quarter. That said, we continue to benefit from an increased customer interest in our newer offerings, namely the Tata Communications GlobalRapide as well as InstaCC and Tata Communications DIGO. DIGO continues to grow in capability as a customer interaction suite, where it focuses to unify all customer interactions. We are seeing customer wins in the layer 2, 3, 4, and our efforts are towards maximizing scale. Coming to our next-gen connectivity offerings. Revenues increased by 5% Q-on-Q and 10.5% year-on-year. The key driver of growth this quarter had been IZO WAN and IZO Private Connect. Our improved offerings on IZO WAN, both in terms of wide variety of internet connectivity options and price competitiveness helped us drive growth. Our vision for IZO WAN platform is to be the most comprehensive dependable connectivity platform, providing a wide range of variety of Internet activity options from predictable enhanced Internet to broadband to 4G, 5G from premises to premises. And premises to cloud and between cloud as well. To sum up, as a digital ecosystem enabler, we remain committed to building innovative and scalable platforms to empower enterprises -- With that, I would like to invite Kabir to give an overview of our financial performance. Kabir?

Thank you, Lakshmi. Good afternoon, everyone. I'll take the opportunity to take you all through the highlights of our financial performance for the quarter. But before I dive into the quarter 4 numbers, it's important to see how we have fared for the full year as a whole. We've delivered full year double-digit data revenue growth, highest ever PAT, highest our double-digit PAT margins full year EBITDA margins of 24.2% within our range of 23% to 25%. ROCE for the full year at 28.3% and is up 290 basis points above last year. PAT is up 21.2% year-on-year. And most importantly, the free cash flow generation is up 64% year-on-year. Even if I were to include tax refunds, these are up by 16%. Effective tax rate for the full year was at 14.4% versus 26.1% in the previous fiscal. For full year, our net debt is down by little over INR 1,000 crores, and net debt to EBITDA has improved to 1.3x from last year at 1.6x. EBITDA to cash conversion has improved from 52% in FY'22 to 59% in FY'23, not long ago, this used to be in the 20s. I'm happy to share that we have demonstrated a meaningful financial turnaround, and incrementally, our focus will be on creating elbow room and capacity for multiyear growth. Let me now talk about the quarter 4 numbers. Our consolidated revenue for the quarter stood at INR 4,569 crores, improving by 7.2% year-on-year and 0.9% on a sequential basis. Data revenue for the quarter stood at INR 3,670 crores, improving by 11.2% year-on-year and 2.2% on a quarterly basis. The reported revenue numbers this quarter, like previous quarter, continues to have certain ForEx benefits accruing from a strengthening sensing dollar. Our EBITDA margins for the quarter were at 22.6%. Our PAT margins for the quarter stood at 7.1%. Net debt for the quarter and for the year remains the same at INR 5,711 crores. And net debt to EBITDA is now at 1.3x compared to 1.45x the previous quarter. The notable part is that on the back of our strong cash flow generation that has been consistently coming down. Our cash flow generation continues to be healthy, reporting an FCF of INR 631 crores this quarter and INR 2,539 crores for FY'23. Cash CapEx for the quarter stood at INR 400 crores, though our approved CapEx is close to INR 600 crores and the gap is attributed to delay deliveries and better payment terms. Our consolidated EBITDA margins declined 120 basis points this quarter to 22.6%. Let me elaborate here a little more on what Lakshmi suggested above on the margin trajectory and the bigger picture. If you look at our ROCE improvement, our PAT improvement, revenue growth, they are suggesting that we are fundamentally transforming as a company to operate in a higher growth trajectory and this needs a very different kind of an OpEx/CapEx structure to fund our growth ambitions. Double-digit revenue growth over the past 3 quarters is an outcome of the investments that we have made, and this was very much planned. Our strategy around product to platform shift and deeper with fewer demanded investment in sales, product platform builds and capacity building. Full year DPS revenue growth and digital platform revenue growth is the highest that we have seen in 4 years, giving us the confidence that we are on the right track. This fiscal, we continue to strengthen our foundation for achieving our growth ambitions through deepening customer engagements and investing in our -- and expanding our global sales and product organizations to address market opportunities. I continue to hold that if we have the right proposals from the business to fund customer success, we will stay the course and fund those opportunities. And even if that implies that margins temporarily go down below the 23% for the short term, we will not hesitate. Having said that, we will manage margins dynamically. In instances where revenue growth is delayed, costs will be pulled. At the same time, we are focused on levers where we will sharpen our modes and help us improve our trajectory in the medium term. Moving to subsidiaries. We've seen a steady improvement in TCTS. TCTS revenue improved by 2.6% year-on-year and 2.7% sequentially coming at INR 342 crores. EBITDA for TCTS stood at INR 13 crores for Q4. We feel confident about TCTS going forward. Our payments business continues to make positive shifts as we expand our portfolio under the franchisee model. Revenue for the quarter came in at INR 46 crores and an EBITDA of INR 21 crores. As on date, we have added close to 3,300 franchisee ATMs to our portfolio, and we are working steadily on increasing this further. The massive uptake of digital payments over the last few years has had an impact on transaction count for the ATMs and the long-term growth profile of this business. As if the company considered an impairment of INR 323 crores in stand-alone books in TCL India. Since TCPSL financial losses have been consolidated while preparing TCL financials, there is no impact on the TCL consolidated financials. To sum up, our holistic delivery across financial KPIs, be it the strong cash flow generation this quarter and overall fiscal, the consistent reduction in net debt, continued improvement impact for the year and our ability to fund both organic and inorganic growth opportunities is laying path to capture the tailwinds and the market opportunities which lie ahead. Let me now ask Chirag to open the forum for Q&A.

[Operator Instructions] The first question is from the line of Sanjesh Jain of ICICI Securities.

Can you hear me. Hello?

We can hear you. Please go ahead.

So sorry, I joined a little late in the call. I apologize if I'm asking something to be repeated. First, on the order book front, we have added close to 2,000 employees. And if I can see most of this employee cost increase has come in the non-standalone, which means that the efforts are to drive the non-standalone business, which is generally the international revenues. How is this translating into a resultant, say, order book sales funnel? And overall, if you can give us color on how has been the order book attrition? And are there -- given that what we have heard from the IT companies till now, it looks like there are certain pullbacks from spend on the IT side. Are we concerned with this trend? How are we looking or what is our interaction with the customers telling us, that's number one. Related one is, we were already sitting, I think, on a healthy order book, and were facing the supply chain issues. Now the supply chain has eased, will it be a fair assumption for us to tell that the execution will pick up, so revenue recognition may not get impacted because of all the sentimental things, which is impacting the investment on the digital side of it. That's my first question.

Yes. I think there are two questions, Sanjesh, or probably multiple in that. Let me try to answer. First one is, I think on the people front, it's not 2,000, as you said. We have added 1,000 for the year. And in terms of -- and those additions have been both in India and international. And we are seeing the additions coming to fruition in terms of the revenue acceleration because these additions that we made in the front end of sales and marketing have been able to reach more customers, build deeper relationships and help us to drive growth and to build the funnel. In terms of the color of the order booking and the funnel, I think the funnel addition last year has been one of the best that we have seen. Our order booking is also good. We are also seeing what we call as large deals, which is more than 1 million ACV, which we classify as large deals. We have seen a significant jump in the number of these large deals, both in India and internationally. So these are all -- I see that as good positive signs of, a, our engagement with our customers, our relevance with our customers and how our platforms are making more an immediate impact in our customers' businesses. So that's the sort of color, I guess that is the first part. The second part, you said is the international trend. In terms of internationally, so far, all our discussions with our customers, we haven't seen any pullback. Largely, I would view in the current macro environment of international where people are cautious, a lot of our portfolios lends itself to a cost-led transformation, and we believe that will make an impact. In fact, overall, for the last year, if you look at the overall order booking, over 40% of the order book is for our digital platforms and solutions. So overall, the color of the order booking and the traction we've been seeing so far is quite good. And that is what -- which we have been saying, and we've been seeing the result of that in the last 3 quarters in terms of increased revenue acceleration. And we believe despite the macro and the caution that you attributed to, we think it will continue because the solutions that we are offering can help our customers genuinely to cut costs.

And order backlog and execution with easing supply chain?

The -- as I had called out that as a business as usual. The supply chain in terms of the equipment delivery from many of the vendors are still not what we experienced pre-COVID. But I had called out some time ago that we are treating that as business as usual. So that is neither affecting our revenue nor accelerating anything. And the reason I say that is many customers have also come to accept that this is the time taken. And we have found already if alternate options available for the customers to go ahead rather than being dependent on one provider. So I would say that's -- more as a business is -- till that we are tracking.

Fair enough. Second question is on the revenue growth. We have earlier guided of a double-digit revenue growth. We are there now, probably it took a couple of years for us to reach it but we are there now. And we also anticipate the mix within data to change 50-50 between the core connectivity and the digital services, which implies that our digital services need to grow 25% CAGR. Do you think you're confident about this mix change to happen and this growth to come in considering the order book and on-the-ground discussion you're seeing with your customers?

Yes, Sanjesh, I think when we launched our strategy, we called out amongst all parameters that we want to hit a double-digit growth. And I've always said that while people were not very patient, I said double-digit growth takes time to get there, right? We need investments in products and building capability and it takes time to do all of that. Now that we are here with our continued investments, I feel quite confident that we can stay the course to execute on that.

I'll just add, Sanjesh. The way in which we should look at it is not from a CAGR kind of a perspective. These are all businesses where I don't know whether it is going to be in next year or year after next, where if you get one transformative deal, then the growth trajectory for that particular year for that part of the business will look in 3 digits as opposed to a steady-state year-on-year 25% kind of a number. So that is how you should look at this, especially when these are all really new edge technologies and things that we want to try to unlock. And the second bit that I would also leave it is that we said we want to get to double-digit growth, 3 consecutive quarters and full year we have reached double digit. We want to maintain that momentum. And our next marker [indiscernible] us to become a comtech player, therefore having a balance of 50-50 between our digital services portfolio and core connectivity. And that is how I would like you to read the ambition and not about whether it is going rectify in exact proportions every quarter and every year.

Clear, clear. Got the message. On the margin side, is it fair to now believe that the bulk of the employee cost is now behind in terms of what we needed to add and realign and attrition is also now normalized. Is it a fair assumption that the cost pressure, whatever we were supposed to see is largely in Q4 and next year when assuming that we deliver a double-digit revenue growth, that operating leverage will play out. Is that the right way to think on the data side of the business?

Sanjesh, two questions. The attrition part is, I can safely say it's behind us. So I mean you probably hear that in the news as well with multiple IT companies also narrating the same thing. So that I can definitely say is behind us. In terms of our hiring, we added 900 , I don't know where you got the 2,000 number from.

I was talking about 2 years, 2, 000 not 1 year, sorry.

Yes. So in the last year, we add about 900 headcount, and there a lot of them are backfilling that we have done plus I would say the net additions, of course, have gone in three areas: Product and engineering side, go-to-market and also our service delivery organization. See, as far as I'm concerned, this is a continuous cycle that we will get into. That's a whole fit-to-grow model, right? We have compelling business proposals that we need to fund. We will continue to fund. So I won't say this is behind us and that we will not do any more hiring, then we will not grow. We will continue to grow, and we need to calibrate as to when I am getting the operating leverage of the headcount and the investments that I have made, when I'm actually seeing that come through. Then we take the next call of doing the next level of investment so that it gets into that continuous momentum. So that is how I would encourage you to actually look at it.

I meant that for the near term, we have hired, we would just want to stabilize this workforce, drive some utilization and then go for the next level of -- so for next year, at least, we are not going to hire another 900, 1,000 people, right?

I think, Sanjesh, I don't want to give any of -- I think we would -- what you say is right. We've added significant amount of people in our products and platforms and in the markets. There are 2 things to look at. Last year, the hiring was done over a period of one year. So not all of the cost have seen a full year impact. So there is a full year impact that would come about this year. And where it is necessary, we would add people. And like Kabir said, we would need to calibrate that in an ongoing basis. And we would calibrate that because we are carefully managing the business in terms of where we are investing and what returns we need to deliver. So that will be calibrated for sure.

Got it. Got it. And my last question is on the CapEx side of it. We guided for a $250 million to $300 million of CapEx. I think we are significantly lower than that this year. How should we think CapEx for the next 2 years?

Well, that -- my guidance remains the same, Sanjesh. That is our intention to spend. And if you see our approved CapEx, we are in that zone. But...

Kabir, when we said this $300 million this includes the additional fiber replacement CapEx as well?

No, it excludes that. Like the movement you see -- I want to get to 50-50 on DPS, right? Let's set aside the efficiency that we should get in our CapEx and operating leverage for a minute. If you do the working backwards, you would find that we would need a significant level of investment to support that kind of a growth ambition that we have. So I'm targeting that $250 million to $300 million as the number. And the reason why we did not spend we've mentioned before, [ due to ] delivery delays, plus we had some better payment terms. So there will be a catch-up of that, that will actually come up in following year. Plus we would like to get into the zone of spending $250 million to $300 million and additionally on top of that for replacement CapEx for the next 3 to 4 years.

Just from the free cash flow perspective, I see we are investing more in the operating expenses. We are investing more in the CapEx. If we need to even maintain the cash flow as a percentage of revenue, that means our revenue needs to grow significantly higher than, say, 11%, 12% else the ROCEs will start diluting. I hope there's a fair assumption that when we say that we maintain that 25% to 30% guidance. All this ambition is well backed by the fact that we will be growing the revenue significantly faster than this 11%, 12%. Will that be a fair assessment?

Yes, that's absolutely right where we have given -- these are all markers and contours that have actually given -- and which sets our own internal working and governance in the company as well, Sanjesh. So yes, our guidance is greater than 25% of ROCE. We will -- we have been operating in that range, in fact, well above. We will continue to operate in that range. 23% to 25% is our EBITDA guidance. But if I have to kick start growth and if I had to invest in a few areas and temporarily for a quarter or 2, it takes me below 23% I'm really not fussed about it because that is being spent on the right areas of investment. It is not waste that we are incurring. And that I want to be clear. So if you mix all of these things, yes, we need a different level of growth trajectory in order to have these ambitions. But at the same time, if these are not fructifying and then these are not, I would say, a free for all, onetime approval given led to go ahead and then spend. These are going to be calibrated. These are going to be milestone-based. And if we are growing well, we're getting in the right direction, where we will be continued momentum investment behind it. where we are going off course, then we will pause and pull back so that we are not diluting any of the ambition on the financial metrics that we have given to you.

The next question is from the line of Aliasgar Shakir from Motilal Oswal.

And quite a detailed explanation. I just have a question from your growth products point of view. So you did give a lot of explanation in terms of your order funnel and how the overall trajectory is. But from a growth product point of view, whether it's MOVE, NetFoundry, CPaaS, or even cloud SIM that you mentioned, what is your traction specifically? I'm asking this more from the point of view that when I see a segment in DPS, I mean there have been a few of them firing. But like CPaaS, which we've been quite positive about, for the full year as well as in this quarter, it's not really done very great. So from your overall growth engine point of view, what are the products where we have most positive outlook and where we think we can drive growth in '24 if we have to do double-digit growth in our data business.

Yes. Ali, I think if you look at the segments, I had called out each one of them, barring collaboration where they have had somewhat of a muted growth. All other segments, the product portfolio segments have grown quite well. And within collaboration, the GSIP, which was sort of dragged a couple of years ago, that has fairly stabilized. And the new products that we have introduced, like the GlobalRapide is gaining traction. DIGO is gaining traction. So we are quite confident that across all product portfolios, we should be seeing good traction.

Okay. Got it. And just one question for Kabir. So you did mention Kabir that a lot of these OpEx investments are very milestone and time line driven. And therefore, whatever investment we are doing, either OpEx or CapEx, we will see the -- I mean, benefits of that or else we will cut them. So in that context, if you could just, I mean, explain how the operating leverage will behave in probably '24, '25 investment that we have done, what is the trajectory of growth and operating leverage we should see? Should we see this margin to recover at some point? And what will be the time line milestone we will look at?

Thanks, Ali, for that question. Look, in the immediate term, this is going to be in the investment phase that we are in. What you have actually seen our OpEx on staffing costs. We haven't seen the full year impact of that yet because our hiring add only more back ended in Q3 and Q4 of this year. So you'll see the full year effect of that coming through, as Lakshmi also outlined and I mentioned to Sanjesh. We are doing the investment on staffing in on headcount on 3 aspects. There is product and engineering, and these are folks who are working on my next set of innovations that will actually come through. Then I have my feet on street, and then I have my delivery organization. These are the 3 large buckets in which our investments have gone. The products follow a cycle of 1-3-30. Stage 1, 0 to 1 stage that we are in, we will see those products coming to fruition maybe 18 months, 24 months from now. Three is where we are currently taking from 1 and going to 3 to 5 customers to see whether it has legs in multiple other industries and multiple other use cases. And 30 is when it gets into the product stage. Now 30 is where you will see operating leverage kicking in because the revenues will come through in FY'24. But for 1 and 3, those will only come through in FY'25 and beyond. Likewise, for the sales organization also, it will take 3 months for any salesperson to come on board and go through the readiness program and be ready and takes another 3 months for them to then start building customer relationships and working on building the funnel and then converting that funnel into an order book. And then we have our own gestation period of when the order book converts to revenue. So that will flow through during the course of FY'24. So here, all we need is sometimes there are some aspects where you look at output metrics and measure the outcome of the business. In some, we need to look at input metrics and measure the right call for the business. I would say this is the input metrics that we need to do that are we doing the right investments in the right places and then do we have governance mechanism internally to see the progress of each of them. And that is how we would want to navigate. And therefore, in FY'24, we are expecting our margins to be at the lower end of the range. Well, that's what I said exactly the same time last year for FY'23, we were helped by the market shift that we actually had in voice in which I called out in a couple of quarters ago. We had some benefit there on the profitability line, which actually took us to 24.2%. Otherwise, we would have probably been in the 23% range. So we will continue to be in the 23% range is what I see for the next year. But these are, in my view, the right investments because we want to now maintain the momentum of a double-digit growth and we want to launch this to a different trajectory. And I'm not going to spell it out for you. You guys can do the numbers yourself. Our ambition of 50-50 on digital platform is -- tells you as to where we need to head and therefore, what investments that need to happen. And I won't be myopic about 1 quarter, 1 year to take away what opportunities this company has ahead for itself.

Got it. So should we expect FY'25 to then start seeing some benefit out of this?

I hope so, Ali. And in FY'25, if we have more places where we need to invest then we will come and tell you guys where we are actually making those investments and why we are making those investments. We talked about MOVE. I mean our portfolio has grown over 100%. IoT, over 90%. I mean these are all markers that tell us that we are in the right direction, and we are getting the right design wins for us. So if tomorrow our CACI and security portfolio gives us promise. Media is another exciting players that we are so confident of and that's why we made the Switch acquisition as well. So these are all green shoots that are available, and these need support. These need the tender, love and care. And we cannot offer to them because they have the ability to scale up to $500 million, $700 million, $1 billion businesses on their own in 5 to 7 years' time.

The next question is from the line of Mr. Gautam Rathi from [ Chanakya Wealth ].

I know people have been asking you regularly about some quantitative color on the order book. And that is where, again, my first question is a request towards that. Lakshmi, whenever you -- if at all, there is any kind of quantitative color that you could give towards the order book. Like even in the fact that what is the order book that we started with in FY'23? And where are we today? Even on an annual basis, that will be very, very helpful for us to see -- to actually see the progress going forward.

Gautam, sorry to cut you short, but I think the ask is well understood Gautam. I think you're asking for lead indicators. Last time around, we did give some indicators of lag in terms of how we are faring in a million dollar customers. I try to give you some color on even the million dollar the large deals within our order book. It's significantly improved and the order booking itself has significantly improved. The reason why I haven't given out the exact numbers is there are a few things that happen in our business, right, in our traditional connectivity as well as in the -- even sometimes in the next-gen connectivity. There is a churn that happens that the customers shift offices or there is a price churn that unfortunately happens. And that something is not very predictable yet, right? So I think we are having to balance that. And then the new order booking that adds on top of it to make up for this churn. . So if I give you one number, I have to then give you another number, which is not that very well predictable because that's based on planned discussions and negotiations that we have. So -- and that would -- and the second aspect of it is the color of the usage business, right? So the usage order booking is purely usage based. If there is an uptick in usage, the revenue goes up. So even in the order booking, it's very difficult to give a proxy order book on what that usage needs to be. We have experimented with the different models internally of attributing a smaller value of order book, attributing almost 0 value to the order book for usage. So these are all things that we are doing so that we get better predictability internally for us to govern. So I hope I'm giving you a color of -- the reason why it's not that we don't want to give you that color. The reason is by giving one parameter, we don't want to misdirect you and confuse.

That's very fair, Lakshmi. And I understand you are taking your time to be absolutely sure that what you share with us is the most relevant information. The only thing is given -- something seems to have given you the confidence that it is the time to push the pedal, right? And you are doing that, right? Just whatever -- if that something -- if there is anything quantifiable is what I was trying to understand. But...

I think qualitatively, if I said that, Gautam, no, I think I mentioned that. If you look at our overall funnel and order booking in FY'23, digital portfolio is 40%, right? So -- which was not the case before. So that would give you a feel for the acceleration of this new portfolio in the order booking in the funnel. The second is what we classify as large deals, which is a million-dollar deal in enterprise segment that has seen a significant growth in the deals and both in India market as well as in the international market. And the third is, as we speak to our customers, we get a sense that our relevance to them is ever more increasing because we are not talking to them anymore just about connectivity and connecting branches. We are truly discussing with them how the digital fabric can help them end-to-end in their own journey to build their digital experiences for the customers, right? So these are the factors that I can tell you as to why our confidence is there.

Fair. And if I were to just know -- Lakshmi, if I were to just take this discussion same on the qualitative line, how has the experience with the PPC and the churn being with respect to that? Because those are, again, two very important parameters that you could associate with the relevance, right? If I were to just take that. How -- if you could give some sense out there? And another framework that you've used is 1-3-30, right. Again, if you were to just overlay that framework and how -- just a few examples out there would be very, very helpful, like where you've kind of tested the 1-3 and you're now in the phase where you are saying that -- it's more like a 3-30 that we are going to push for in the coming quarters.

So when you meant PPC, I think the product penetration.

Yes, yes, yes.

Got it, yes. So no, I think that is a number of products per customer is definitely seeing an upward trend. Even though I'm not tracking that metric by itself because even when we had a product penetration of 4 before, I sometimes used to see while that ratio is 4 but the revenue with the customer was small, right? Because there's no point in doing very small things with 4 products, and that was not very meaningful. We do measure that, but I don't assign too much of weightage to that. So I look at more how many customers are at the threshold of $1 million and how many million dollars customers do we have? And how is that growing? We put out that number last year, and we will put out that number on the Investor Day that we would have in June. You would see the growth in that. So that's one parameter for how we see our relevance to the customer is increasing. In terms of order book -- sorry, in terms of churn that you asked for, I think I alluded the churn, last year, we were able to reduce it through strong actions from the team in the front, supported by all the delivery and assurance functions. And we are trying to move that to a more programmatic activity to see how we can engage early with the customers to reduce the churn. But this is something it seems to be more of an industry factor that we are caught up in. Until we transform ourselves to fully realize our vision of digital fabric, which is in progress. this churn is going to be there. So I hope that answers the question that you had.

Just the last part, which was the 1-3-30, what I meant out there was just a few examples where basically, what I'm trying to understand is you've ceded a number of initiatives and you -- what I understood was you wanted some of them to kind of reach that 3 leverage before you really scale it up. So are there visible examples of that...

so there are visible examples. The 1-3-30 is a very continuing thing. It's not -- a product at any point in time, will have several 1s because if you look at GlobalRapide, we started with Stage 1. We have now launched the GlobalRapide 2.0 and 2.0 has enhanced features. So while the GlobalRapide itself is in stage 30, the 2.0 is still in stage 1, for example, right? And GlobalRapide has seen a significant growth in terms of number of seats that we won last year and the number of seats that we are deploying. Similarly, within -- even the next-gen connectivity, we had the IZO WAN and we launched the stage 1 of the -- with multiple variants and that has now reached stage 30. So -- and we said that our next-gen connectivity has seen a good amount of growth. And we are further continuing to expand. So I think if I were to give a color to you, in the past, we used to say that if -- a sweet spot of our customers in the international market is any customer having presence in 5 regions and their network requirement is no more than 30% in the domestic market and 70% of the requirement is in international market, that would be our sweet spot because our true strength was then the international connectivity that we offered, and we were not able to fight against the strong local incumbents. But today, that ratio has shifted rather than 30-70, we just want a deal which is 70% regional and 30% international. And that was possible because of this 1-3-30 approach of introducing new products and taking these to customers in a staged manner, right? So -- and I think also have a sugar and we'll probably share during the Investor Day last year. We do track how much revenues that we are getting from stage 3 moving to stage 30 and last year of the incremental revenues that we showed, a significant part of it came from the products that moved from 1-3 to 30.

The next question is from the line of Mr. Vinit Manek from Karma Capital.

One question for you, Kabir. Just coming to the depreciation part. So there was INR 64 crores, INR 65 crores of absolute increase in the depreciation during the quarter. So I just wanted a clarification that was there any one-off during the quarter in terms of depreciation? Or this is a sustainable run rate that we will be seeing going forward?

There was a onetime correction that we actually did in our -- the way in which we used to recognize cable life and the residual value of cable life. I know that was about INR 40-odd crores where we took that correction. So aside that, I think it's fixed business as usual.

Okay. So it was just a INR 40 crores one-off during the quarter in terms of your depreciation?

Yes. So we used to have -- as per the company's act, we used to recognize 5% as a terminal value and then depreciate the balance over the life of the cable. And then we took a call since we are not getting in that 5% anyway when we decommission the cable. We made that change for all the past ones which have finished life we have taken the hit and all the ones which have useful life left over we have apportioned that over the rest of the life of the cable. And that, therefore, you'll see a small change in the future until its end of life, but this INR 41 crores represents the past.

So near term, maybe 2 or 3 quarters, you might still see something like this coming or it's already done?

It's already done. There's nothing more that will actually come. Whatever will come is go be marginal -- a very, very marginal increase, insignificant and immaterial from your point of view.

The last question is from the line of Mr. Pratap Maliwal from Mount Intra Finance. The next question is from Mr. Abhishek Singhal from Naredi Investments.

Sir, my first question, effective tax rate in FY'23 was 14%. So what will be the effective tax rate in FY'24? And second question, what will be the EBITDA margin in FY'24? And what kind of growth expectation in top line for FY'24?

Yes. Abhishek, we don't give specific numbers as guidance for every quarter or future years. As we said, our stated ambition is double-digit growth. We have delivered that for the last 3 consecutive quarters and for the full year. And our endeavor is to maintain that same momentum going forward. our EBITDA ambition is to stay in the 23% to 25% range. And as Ali and Sanjesh asked, I clarified for FY'24, we expect corporate at the low end of the range. for various investments that we are actually making. And I have nothing further to add other than restating and reiterating the same ambition that we have given.

Okay. And the effective tax rate for FY'24?

The effective tax rate for FY'24 will be better than what it has been in the past of 25%, 26%. That is because we have net operating losses in international geographies. And as international geographies are becoming more and more profitable, we are utilizing those losses, plus also recognizing that as a deferred tax asset in our books. So it is not just that we are -- it's also an asset that we are creating in our balance sheet. So you should be able to see that in conjunction. And we hope to operate at a good levels of ETR, what exact number? I'm sorry, I'll not be able to give you that, Abhishek.

Okay. And sir, last question is my -- sir, what is the onetime acquisition cost of Switch Enterprises, which was acquired for INR 486 crores in December? And when it reflect in profit and loss account statement?

So this will -- this has not yet come in our books, Abhishek. As Lakshmi mentioned in his call, we expect all approvals to come through and integration to start only in the first quarter of FY'24. So we have not paid any of these things yet until the close has happened. There will be some costs on account of due diligence and other M&A-related ancillary costs that we have actually absorbed in our current year financials.

This bring us to the end of our call. I will now request Lakshmi to share his closing comments.

Thanks. Thank you, everyone. I just wanted to say how pleased we are in terms of where we are today and having got to a double-digit growth and having achieved all the financial parameters that we set out to achieve in our strategy. We are very well poised for the next phase of our journey in our strategy, which remains the same, and we will continue to execute on that. Thank you very much for the support.

Thank you, Lakshmi. This brings us to the end of the call. In case of any queries, please write to [email protected], and we'll respond accordingly. The recording will be available on our website in the next 24 hours. You may please disconnect now. Thank you so much.